JPMorgan Settlement Hinges On Criminal Charges

Settlement talks between JPMorgan Chase and the U.S. Department of Justice regarding the bank's sale of ‘faulty’ mortgage-backed securities (MBS) and loans to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac ‘are in danger of breaking down over the bank's demands that it avoid future criminal charges,’ the Washington Post reported on Wednesday.

The news comes just days after the Federal Housing Finance Agency (FHFA) announced that JPMorgan had agreed to pay a $5.1 billion fine to settle claims that the bank sold faulty MBS to the GSEs from 2005 to 2007. The fine is part of a $13 billion settlement that JPMorgan has been negotiating with federal prosecutors for months.

Under the terms of the agreement announced last week, JPMorgan will pay about $2.74 billion to Freddie Mac and $1.26 billion to Fannie Mae to address claims of alleged violations of federal and state securities laws in connection with the sale of private-label, residential mortgage-backed securities.

In addition, JPMorgan Chase Bank NA will pay a total of approximately $670 million to Fannie Mae and $480 million to Freddie Mac, for a total of about $1.1 billion, for ‘faulty’ mortgage loans that it sold to the GSEs.

The loans in question were originated by Bear Stearns & Co. and Washington Mutual, which JPMorgan acquired following the financial crisis. JPMorgan has admitted to no wrongdoing in the case.

‘The satisfactory resolution of the private-label securities litigation with JPMorgan Chase & Co. provides greater certainty in the marketplace and is in line with our responsibility for preserving and conserving Fannie Mae's and Freddie Mac's assets on behalf of taxpayers,’ Edward J. DeMarco, acting director of the FHFA, says in a release issued Oct. 25. ‘This is a significant step as the government and J. P. Morgan Chase move to address outstanding mortgage-related issues. Further, I am pleased that a resolution of single-family, whole-loan representation and warranty claims could be achieved at the same time. This, too, will have a beneficial impact for taxpayers and the housing finance market.’

‘This agreement appropriately resolves our repurchase claims, compensates taxpayers for losses fairly and allows Fannie Mae and J.P. Morgan Chase to move forward as strong business partners,’ adds Timothy J. Mayopoulos, president and CEO of Fannie Mae. ‘One of our goals in 2013 was to put legacy issues behind us so we can focus on building a stronger housing finance system for the future. We have made significant progress, and will continue working with our customers to bring our representation and warranty claims to a satisfactory close.’

The FHFA reports that it has now settled four of the 18 mortgage-backed securities suits it filed in 2011. Those suits were brought in an attempt to get back at least some of the losses taxpayers incurred when the federal government took control of Fannie Mae and Freddie Mac in 2008.

The GSEs have, so far, paid back about $146 billion of the $187.5 billion in federal aid they took in 2008 – most of it in the form of dividends paid to the U.S. Treasury.

Earlier this month, Wells Fargo agreed to pay $869 million to Freddie Mac to settle disputes over faulty mortgages the bank sold to the firm prior to Jan. 1, 2009. As per the agreement, Wells Fargo will make a one-time $780 million cash payment to the GSE – a reduction based on credits tied to previous buybacks.

In addition, Bank of America and Citigroup have been working to resolve similar claims over faulty mortgages sold to the GSEs. Earlier this month, Citigroup agreed to pay $395 million to Freddie Mac – and in July, it agreed to a $968 million settlement with Fannie Mae.

According to the Washington Post report, things heated up between bank officials and federal prosecutors on Sunday night, when attorneys for JPMorgan proposed a deal that would give the bank protection from future criminal investigation.

Attorney General Eric H. Holder Jr. has, so far, refused to grant the bank a waiver from criminal prosecution as part of the settlement.